This is a brief market review; you can find more in-depth ones in my newsletter, which I send out monthly. This was written in June, and the aim is to inform you of what’s happening in the markets, through data, thoughts and opinions.
I’ve been managing expats finances in Asia for 10 years. If you have any questions, please contact me through my contact page.
Blogs which I have written:
- Best Investment Platforms for Expats in 2025
- Morningstar SIPP Review 2025
- 3 Residency Programs – High Net Worths
All-Time Highs?
While U.S. equities have surged, pushing the S&P 500 past 6,000 and the DAX to fresh all‑time highs in Europe, investors are increasingly divided as to keep being bullish on this market or to pessimistic. On one hand, many analysts are raising the alarm: valuations are historically elevated. On the other, optimists like Tom Lee at Fundstrat suggest even more upside, with this mixed chorus prompting debate among banks and strategists.
But, is this time for you to rethink your allocation since markets have fully recovered from the Liberation Day tariffs and are not far off record highs, or are the markets justified as the forward earnings are still looking positive?
Figures: Below YTD total returns 6/5/2025 of countries and regions (right). Percentage off the 52-week highs. (Left). Source: Bloomberg.
Figure: Below is the earnings update of the S&P 500 for the next 12 months. Source: Bloomberg.
The Bear Case: Valuations Are Too High
Valuation models signal red flags. One forward P/E measure shows the S&P 500 trading well above its long-term average of ~15–16x earnings, hovering in the 20–23x range. The Shiller CAPE, smoothing earnings over 10 years, also remains near peaks seen only around 2000—echoing bubble-era valuations.
Prominent financial voices also lean cautious. Morgan Stanley’s Lisa Shalett warns of “rising long‑term yields,” a weak dollar, and risk aversion, suggesting returns of just 5–10% annually for U.S. equities and a need for diversified portfolios, including international and fixed income assets. Goldman Sachs, Vanguard, and J.P. Morgan echo this caution: they forecast subdued market gains, 1–3% above inflation, for the next decade.
https://www.barrons.com/articles/nvidia-stocks-lost-devade-growth-value-8dce638e?
The Bull View: More Upside Ahead
Still, not everyone expects a slowdown. Tom Lee of Fundstrat sees further upside, predicting the S&P 500 could reach 6,600 by year-end. His rationale: about 40% of returns come from newly added companies to the index every decade, and that trend hasn’t slowed. He also argues that U.S. firms will continue leading globally, even against headwinds.
Analysts at Morgan Stanley, Goldman Sachs, and Citi are also moderately bullish. Mike Wilson of Morgan Stanley cites a rebound in earnings revisions—as more analysts are upgrading forecasts—which historically correlates with roughly 13% annual S&P returns, and pegs 2025’s target at 6,500. Citi has raised its year-end target to 6,300, citing sustained optimism around AI-driven earnings and resilient capex. Deutsche Bank and UBS align, projecting 6,550 and 6,000, respectively.
Even Goldman Sachs notes “no significant correlation between 10-year yields and S&P return” when yields hover near current levels implying that while yields may inch sideways, equity valuations don’t necessarily have to decline.
Bank Consensus: Cautious Optimism
- Goldman Sachs, Morgan Stanley, Citi, Deutsche, UBS, and Barclays have raised their forecasts post the 6,000 milestone, but remain wary of valuation excess and macro risks.
- Mike Wilson (MS) targets 6,500 – lifting off the back of broader earnings upgrades.
- Citi, Deutsche, UBS, and Barclays float within the 6,000–6,550 range by the end of 2025.
The overall tone? “Manageable volatility,” but diminishing gains unless earnings line up.
This measured optimism reflects a balancing act: growth in innovation and resilient earnings vs. valuations priced for perfection—and full pricing of tariff, rate, and geopolitical uncertainties.
My View
Although I do believe the market is currently overvalued, especially considering the political uncertainty expected in the coming months, there are several reasons to be cautious. Business confidence may be tested, with many firms already signalling potential reductions in capital expenditures (CapEx). Additionally, the recent wave of tariffs could begin to erode profit margins, especially for companies heavily reliant on global supply chains.
So far, earnings from U.S. mega-cap stocks, excluding outliers like Tesla and Apple, have remained largely resilient. Nvidia, for example, delivered strong Q1 results, reinforcing its leadership in the AI hardware sector. However, this concentration of market strength within a few dominant firms raises concerns. If these companies, especially those like Nvidia with significant exposure to China, start to experience revenue slowdowns, it could have a disproportionate impact on the broader index due to their sheer market weight. According to FactSet, the “Magnificent Seven” now account for more than 30% of the S&P 500’s market capitalisation.
One of the more worrying signals is the softening of the U.S. consumer, who has been a major driver of economic resilience and market performance over the past five years. The University of Michigan Consumer Sentiment Index recently hit a six-month low, suggesting that confidence is waning. As this sentiment filters into actual spending behaviour, questions arise about how long consumer staple companies can maintain their elevated valuations. If consumption begins to falter, especially in discretionary categories, we may also see a pullback in advertising and AI infrastructure spending, two areas that contribute significantly to the earnings of companies like Alphabet, Meta, and Microsoft.
While I remain optimistic about the long-term prospects of the U.S. economy, continued growth will likely require both political stability and a more constructive economic policy environment. Markets can tolerate uncertainty to a point, but sustained investment requires visibility—and right now, that visibility is clouded.
In Europe, I do think the recent outperformance of EU equities is partially justified. European markets have lagged behind their U.S. counterparts for nearly 15 years, and a degree of mean reversion is both natural and welcome. However, when you examine the details, much of the growth has been concentrated in specific sectors like defence, which have benefited from an increase in military spending and government contracts.
For instance, companies such as BAE Systems have posted strong performance, but much of their growth still relies on ties to the U.S. defence ecosystem. As geopolitical dynamics evolve, those links could weaken, raising questions about the sustainability of their valuations.
Moreover, many European firms remain exposed to the same systemic challenges they faced in 2024. Chief among them are regulatory hurdles, sluggish domestic demand, and political fragmentation. The Mario Draghi report commissioned by the European Commission last year emphasized the need for sweeping reforms to improve competitiveness and foster innovation in Europe. Without meaningful progress, companies heavily reliant on the European market may continue to underperform in the long run.
I would still overweight the U.S. for several reasons. As Tom Lee of Fundstrat has pointed out, the U.S. remains a global leader in innovation. Historically, around 40% of S&P 500 earnings in each decade have come from new companies, demonstrating the market’s ability to regenerate and adapt. That said, I believe investors should take a more selective approach moving forward. A “barbell strategy” allocating capital between high-growth technology names and stable, defensive sectors like healthcare and consumer staples, can offer a prudent balance of risk and reward. At the same time, increasing geographical diversification can help hedge against rising geopolitical risks, whether from trade tensions, elections, or systemic shifts in global power.
If you have any questions, please contact me through my contact page.
Here are blogs you will find useful:
- 2025: Malaysia My Second Home (MM2H) Visa
- Comprehensive Estate Planning Guide for Expats in Thailand
